NEW YORK--(BUSINESS WIRE)--Bankruptcy court approval of the plan of reorganization (POR) moves Edison International (EIX) closer to a final resolution of its exposure to Edison Mission Energy's (EME) insolvency and, in Fitch Ratings' opinion, represents a positive development for EIX's creditworthiness. On March 11, 2014, the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division, approved EME's POR, positioning EME to emerge free of liabilities.
From a broader industry perspective, EME's insolvency underscores the challenges facing merchant generators. Among these challenges are Fitch's expectations for a continuation of relatively low power and gas prices, as well as rising costs related to environmental regulations and modest prospective sales growth due to competitive pressures from both energy-use efficiency and renewable generation.
The approved POR incorporates the settlement agreement reached between EME, EIX and certain EME creditors in February 2014. Fitch upgraded EIX's ratings and placed them on Rating Watch Positive on Feb. 21, 2014, in anticipation of bankruptcy court approval of the POR. Fitch expects to resolve the Rating Watch Positive upon closing of the pending sale of certain EME assets to NRG Energy, Inc. and the formation of the new trust contemplated by the settlement agreement.
Under the terms of the POR, EME will remain a subsidiary of EIX, while EIX will assume certain income tax and pension liabilities approximating $350 million and retain certain tax attributes totaling an estimated $1.191 billion. All assets and liabilities of EME that are not assumed by EIX, discharged in bankruptcy or transferred to NRG Energy, Inc. (NRG) under the POR will be transferred to a newly formed trust to be controlled by EME creditors.
The closing of the sale of EME assets to NRG and the settlement transaction is expected to occur around late March or early April 2014. Upon closing, EIX will pay $225 million to the trust. EIX will make two additional payments in September 2015 and 2016 following the final determination of tax attributes to be shared between both EIX and EME's creditors under the terms of the POR. Total payments from EIX to the trust are expected to approximate $635 million, approximately one-half of the value of the tax attributes.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.